The U.S. Supreme Court this week rejected both parties’ petitions for certiorari in appeals of the 9th U.S. Circuit Court of Appeals’ Epic Games v Apple decision. Many observers—including Epic CEO Tim Sweeney—have marked this as an unmitigated loss for Epic.
That’s partly right. The district court had correctly rejected Epic’s federal antitrust claims against Apple (and against Epic, on Apple’s breach-of-contract counterclaim); the 9th Circuit upheld the trial court’s decision; and the Supreme Court’s refusal to grant cert leaves those Epic losses undisturbed.
But Apple was denied a sweep at the district court, which ruled in favor of Epic’s claim under California’s Unfair Competition Law (UCL). The 9th Circuit likewise sustained that state law decision. The Supreme Court has thus left both that state law decision and the district court’s nationwide injunction undisturbed.
The state law decision was not a trivial matter, and its practical ramifications present four distinct challenges.
First, the district court’s injunction is overly broad, as it applies to all app developers on the App Store, not just to Epic. Second, the district court’s finding that Apple’s anti-steering provisions violate California’s UCL are inconsistent with its conclusion on the federal antitrust law counts. Third, and relatedly, this discrepancy effectively enables a single state’s unfair competition law to undermine federal antitrust policy nationwide. Fourth, but related specifically to federal antitrust law, the Supreme Court could have taken this opportunity to clarify some of the contentious questions surrounding the fourth step of the rule-of-reason framework.
Ultimately, the case is a victory for no one. After costly and complex litigation on both federal and state competition claims, the biggest “change” is that Apple now has to delete its anti-steering provisions. Apple, however, remains entitled to charge a commission fee for use of its iOS and App Store—as it no doubt will continue to do. Epic’s attempt to circumvent Apple’s IAP fees has thus, for now, been for naught. If anything, Apple’s new method of collecting may actually be more cumbersome, and therefore worse for developers.
It is therefore not clear what the case has achieved, other than debilitating Apple’s ability to enforce strict privacy and security standards on its platform, thanks to an overly broad nationwide injunction.
The Epic Games v Apple Saga Thus Far
In the original complaint, Epic challenged as a violation of federal antitrust law Apple’s prohibition of third-party app stores and in-app-payment (IAP) systems from operating on its proprietary iOS platform. The U.S. District Court for the Northern District of California ruled against Epic, finding that the company’s real concern was its own business interests in the face of Apple’s business model—in particular, the commission that Apple charges for use of its IAP system—rather than harm to consumers and to competition more broadly. It also found that Apple’s IAP and App Store restrictions were an integral part of its “walled garden” model, which benefitted users through increased privacy and security.
At the same time, District Court Judge Yvonne Gonzalez Rogers found that Apple’s anti-steering provision—i.e., the prohibition on informing users about payment options other than Apple’s IAP—violated California’s UCL. She issued an injunction forcing Apple to allow links and other “calls to action” that would bypass Apple’s payment system.
Both parties appealed to the 9th Circuit, which affirmed in part and reversed in part the district court’s judgment, which included affirming the injunction against Apple’s anti-steering provisions. At the time, we at the International Center for Law & Economics (ICLE) filed an amicus brief in favor of Apple’s rehearing request, in which argued that, if Apple’s IAP and App Store restrictions did not violate federal antitrust law, they could not violate UCL, either:
The panel’s holdings that (1) Apple’s conduct with respect to its close control over the App Store and restrictions on in-app payments…do not give rise to an antitrust violation, but that (2) its anti-steering provisions nevertheless violate California’s Unfair Competition Law… are incongruent. The anti-steering provisions violate the UCL only if they constitute an “incipient violation of an antitrust law, or . . . [cause harm] comparable to or the same as a violation of the law.” Cel-Tech Commc’ns, Inc. v. L.A. Cellular Tel. Co., 20 Cal. 4th 163, 186-87 (1999). But provisions limiting app developers’ ability to steer consumers to alternative payment options exist merely to further the goals of the lawful IAP restrictions, and thus the anti-steering provisions cannot constitute incipient antitrust violations or cause harm comparable to such violations.
Having affirmed the District Court’s finding that Apple’s IAP policies are procompetitive, the panel should have ruled that Apple’s anti-steering provisions— which constitute a less restrictive means of pursuing the same procompetitive objective—are not unfair under the UCL.
We contended that, if left to stand, the court’s decision risked chilling procompetitive conduct by deterring investment in efficiency-enhancing business practices, such as Apple’s “walled garden” iOS. More egregiously, it risked creating a fundamental contradiction by enjoining conduct under the UCL that is benign— and even beneficial—under antitrust law. Indeed, the district court had recognized that Apple had non-pretextual, legally cognizable, pro-competitive reasons for its IAP restrictions.
Apple also filed a petition requesting a motion to put on hold the appeals court ruling pushing the company to undo its anti-steering provisions. The circuit court granted the petition, and ordered a stay on that part of the ruling in July 2023, giving Apple 90 days to petition the Supreme Court and see if its appeal was taken up. Epic moved to block the petition before the Supreme Court, but was denied.
Apple and Epic both filed a motion for a writ of certiorari before the Supreme Court; with the outcome of the Epic Games v Apple saga now hinging on whether the Court would take up the dispute. This week’s decision resolves that question.
What it means, in a nutshell, is that Apple wins on the federal antitrust counts, but will be forced to remove its anti-steering provisions in line with the district court’s injunction, which is based on California’s UCL. That injunction is now in effect, meaning that developers can now include in their apps “buttons, external links, or other calls to action that direct customers to purchasing mechanisms, in addition to IAP.”
Overall, this is a blow to Epic’s efforts to open iOS to competing stores and payment systems, and thus to its ultimate goal: free access to iOS users. As we argued in our amicus brief filed before the 9th Circuit:
Ultimately this case boils down to Epic wanting a free ride for its own Epic Games Store and its own IAP on iOS.
Judged from this perspective, Epic’s legal crusade has been a fiasco. There are, however, a string of problems with the nationwide injunction against Apple’s anti-steering provision that dilute Apple’s victory and undermine the consistency of the district court’s ruling.
The Injunction Is Nationwide and Extends to All Developers, Not Just Epic
While Epic v. Apple was not a class-action lawsuit, the district court’s nationwide injunction applies to millions of non-party app developers. In other words, this ruling allows one aggrieved party, which is no longer even present on the App Store, to dictate the terms and conditions for millions of app developers. These developers signed Apple’s guidelines on the exclusive use of the IAP and the related anti-steering provisions, and may reasonably prefer their apps to benefit from the full advantage of Apple’s walled-garden model, rather than risk it being compromised by lesser, third-party IAPs.
Incidentally, as part of a settlement in Cameron v. Apple Inc—a class-action lawsuit filed in the very same Northern District of California that involved some 6,700 developers—Apple removed a prohibition on targeted communications between developers and consumers outside of the app, meaning that developers are now free to communicate outside the apps about external purchasing options (or anything else). But that settlement did not require Apple to modify or remove the anti-steering provision, making it even more jarring that a case involving a single plaintiff would do just that. Not only does this contradict the principle that “injunctive relief should be no more burdensome to the defendant than necessary to provide complete relief to the plaintiffs,” it could also cause serious harm to nonparties who had no opportunity to argue for more limited relief.
The District Court’s UCL Findings Undermine Its Conclusions Under Federal Antitrust Law
The district court’s nationwide anti-steering injunction is also difficult to reconcile with the court’s simultaneous rejection of Epic’s antitrust claim.
In its decision, the district court recognized that Apple’s walled-garden model yields procompetitive consumer benefits—including greater privacy and data security—and that such benefits are cognizable under federal antitrust law.
The district court conceded that Apple’s “closed” distribution model allows the company to curate the App Store’s apps and payment options. For example, Apple’s guidelines exclude apps that pose data-security threats, threaten to impose physical harm on users, or undermine child-safety filters. These rules increase trust between users and previously unknown developers, because users do not have to fear that their apps contain malware. The terms also alleviate user fears about payment fraud. By increasing the total value of the platform, these benefits increase the total number of transactions it facilitates. Indeed, those wondering about the pro-consumer aspects of Apple’s walled-garden model might consider Epic’s 2023 settlement with the Federal Trade Commission (FTC): Epic agreed to pay $245 million to settle charges that it “trick[ed] players into making unwanted purchases and let children rack up unauthorized charges without any parental involvement.”
In addition, anti-steering provisions (especially in two-sided markets) have other, legitimate procompetitive benefits, such as preventing free riding. “Free riding” occurs when someone uses a valuable resource without paying for it. In this case, Apple owns a valuable resource that it has created and steadily improved: the iPhone and iOS ecosystem, including the App Store. Apple currently charges commissions of between 15% and 30% for digital goods sold through the App Store, including for certain in-app purchases. Epic would like to access that ecosystem without paying.
But while Epic may benefit from its long-term strategy to reduce the fees it pays to Apple, consumers might not. If reductions in revenue from the iOS ecosystem mean that Apple has less incentive to invest in it, Epic’s gain may come at the consumer’s expense. In other words, by preventing free riding, anti-steering provisions maintain Apple’s incentives to invest in its iOS, to the ultimate benefit of both sides of the market: consumers and developers.
The district court correctly rejected Epic’s primary claim, as Epic failed to establish under antitrust law any cognizable harm from Apple’s prohibition of third-party app stores and IAPs. In essence, that foreclosed Epic’s ability to directly circumvent the App Store and pay a lower commission, or none at all. But in granting a nationwide injunction against Apple’s anti-steering provisions, the district court facilitated precisely that type of free riding. And, since Apple’s practice of vetting unsafe payment systems and malware on its App Store depends on its ability to prevent third parties from “steering” consumers towards purchase mechanisms other than Apple’s secure IAP system, the district court also undercut the very security and privacy benefits which it recognized as valid procompetitive justifications for Apple’s policy.
State Law Should Not Undermine the Fundamental Goals of Federal Antitrust Policy
The fact that anti-steering provisions are procompetitive should be a relevant factor in whether a federal court grants nationwide injunctive relief. To interpret California’s UCL as the district court has done—in a way at loggerheads with federal antitrust law, while permitting a nationwide injunction— is to undermine the fundamental goal of antitrust policy, and to do so on a national level.
As discussed above, the district court recognized Apple’s security arguments as a key procompetitive factor that determines Apple’s success and increases output across the platform, ultimately benefiting both consumers and developers. Yet the court issued an unnecessarily broad injunction against Apple’s anti-steering provisions that risks chilling procompetitive conduct by deterring investment in efficiency-enhancing business practices, such as Apple’s walled-garden iOS (e.g., by facilitating free-riding.)
Even more egregious is that the district court’s injunction risks undermining federal antitrust law by enjoining conduct under state unfair competition law that is recognized as benign—and even beneficial—under federal antitrust law. If the district court’s remedy is left to stand, state laws will be stretched beyond their territorial remit and used to contradict federal antitrust laws nationally, thus eviscerating federal antitrust policy from the bottom-up. This is not an unrealistic prospect: California has already shown an appetite to use its UCL to seek nationwide injunctions (see here).
A Missed Opportunity to Clarify Step Four of Rule-of-Reason Analysis
Apple’s petition for certiorari arises from Epic’s state law claims, on which Apple lost. Epic’s petition, on the other hand, arises from the rule-of-reason framework under federal antitrust law, on which Epic lost. Epic contends that there is no need to consider costs in assessing less-restrictive alternatives (LRAs) under step three of the rule-of-reason analysis, and argues that, as a matter of law, courts should undertake a fourth step of “balancing” competitive effects.
On the former point, both parties agreed that, in line with 9th Circuit’s 2015 O’Bannon decision:
[T]o be viable . . . an alternative must be “virtually as effective” in serving the procompetitive purposes of the [challenged restraints], and “without significantly increased cost.”
Further, as we argued in our amicus brief to the 9th Circuit in Epic v Apple, the reliance on LRA in this case is misplaced for at least two reasons. First, by failing to show net anticompetitive harm accounting for both sides of a two-sided market, Epic failed at step one of the rule-of-reason analysis, thus rendering LRAs irrelevant (see also here). Second, forcing Apple to adopt the “open” platform that Epic champions would reduce interbrand competition and improperly permit antitrust plaintiffs to commandeer the judiciary to modify routine business conduct any time a plaintiff’s attorney or district court can imagine a less-restrictive version of a challenged practice, and to do so independent of whether the practice promotes consumer welfare. This is particularly problematic in the context of two-sided platform businesses, where such an approach would sacrifice interbrand, systems-level competition for the sake of a superficial increase in competition among a small subset of platform users (see also here).
On the “fourth step” point, it should be noted that the Supreme Court’s most recent rulings in this area of law—i.e., Alston and Amex—did not require a fourth step. And why would they? Cost-benefit analysis is already baked into the rule of reason. As the 9th Circuit itself recognizes:
We are skeptical of the wisdom of superimposing a totality-of-the-circumstances balancing step onto a three-part test that is already intended to assess a restraint’s overall effect.
Further:
Several amici suggest that balancing is needed to pick out restrictions that have significant anticompetitive effects but only minimal procompetitive benefits. But the three-step framework is already designed to identify such an imbalance: A court is likely to find the purported benefits pretextual at step two, or step-three review will likely reveal the existence of viable LRAs.
It is therefore unclear what benefits a fourth step would offer. In most cases, it would only serve to “briefly [confirm] the result suggested by a step-three failure: that a business practice without a less restrictive alternative is not, on balance, anticompetitive.”
The “fourth step question” was complicated by the 9th Circuit, which held (albeit reluctantly) that where the plaintiff fails to show an LRA as part of a “third step” in rule of reason, a fourth step is required to weigh the procompetitive against anticompetitive effects. The problem with this logic is twofold. First, it is circular. If, as the 9th Circuit notes, the rule of reason is not a “rotary list,” why was the district court’s failure to undertake a fourth step seen as a mistake (even if, by the circuit court’s own admission, it was a harmless one)? Shouldn’t it be enough that the district court weighed the procompetitive and anticompetitive effects correctly? And second, it could grant plaintiffs not one, but two last-ditch (and unjustified) attempts to make their case, even after having failed previous steps.
While the district court’s decision (where these blemishes are less visible) stands, the Supreme Court could have used the opportunity to set the record straight. The interpretation of LRAs and the fourth step of the rule-of-reason that the circuit court espoused could have ramifications not just for the parties in the present dispute, but for antitrust law more broadly.
Conclusion: Less Than a Pyrrhic Victory
That Epic “lost” because it didn’t get exactly what it wanted doesn’t mean that Apple won. Nor does Apple’s loss on the state claims do much for Epic, either.
Apple’s removal of the anti-steering provisions is unlikely to benefit Epic, or any other developers. Even if Apple jettisons anti-steering provisions (and thus cannot charge a commission through IAPs), it is still allowed to recoup its investment through other means.
For instance, Apple could allow independent payment processors to compete, and charge an all-in fee of 30% when Apple’s IAP is chosen. To recoup the costs of developing and running its App Store, Apple could also charge app developers a reduced, mandatory per-transaction fee (on top of developers’ “competitive” payment to a third-party IAP provider) when Apple’s IAP is not used. Indeed, where a similar remedy has been imposed already, Apple has taken similar steps. In the Netherlands, for example, where Apple was required by the Authority for Consumers and Markets to uncouple distribution and payments for dating apps, Apple has adopted a policy under which any apps that want to use a non-Apple payment provider must still “pay Apple a commission on transactions” of 3 percentage points less than normal (so, 27%, for most transactions), a slightly “reduced rate that excludes value related to payment processing and related activities.” (see here).
Something similar is likely to happen in the United States. Indeed, it seems to have happened already. While Apple now lets developers link to outside payments, it is still charging a 27% commission, even where buyers obtain digital goods and services from a website linked to from within the app (see here).
Materially speaking, then, the injunction changes practically nothing. Developers still have to pay Apple an almost identical commission as before, whether they use Apple’s IAP or not. That is the sense in which Sweeney was right to regard the Supreme Court’s denial of certiorari as a wholesale loss. If anything, this outcome could be even more cumbersome, and therefore worse for developers. As Ben Thompson has written:
I wouldn’t be surprised if Apple does the same in this case: developers who steer users to their website may be required to provide auditable conversion numbers and give Apple 27%, and oh-by-the-way, they still have to include an in-app purchase flow (that costs 30% and includes payment processor fees and converts much better). In other words, nothing changes.
[…]
The 7-day attribution period is pretty aggressive, and gets closer to the worst-case scenario I described above. Now not only will Apple collect whenever a user initiates a purchase within an app, but they also insist on collecting even if a user comes back to the webpage (not app!) at any time within a week after clicking the app. That, by extension, means that developers will need to track users to know if they arrived on the website from said link.
Furthermore, it could also reduce the overall attractiveness of Apple’s platform by making it more vulnerable to the security and privacy threats posed by third-party IAPs.
Another question is whether or not Apple’s “victory” will be overturned by the imminent entry into force of the European Union’s Digital Markets Act, which will supposedly force Apple to allow alternative IAPs and App Stores on its iOS (for a skeptical view, see here). For now, however, Apple’s only victory is that it didn’t lose.
